Appeals court: Subcontractor doesn't need to conduct investigation for 'justifiable reliance'
- An appeals court has found that federal contract law, according to attorney Sunu Pillai of Saul Ewing Arnstein & Lehr LLP, does not require a subcontractor to carry out its own investigation into the representations made by a general contractor when pursuing a claim of fraudulent inducement, which occurs when one party makes false statements to a second party that cause the second party to act against its best interests and results in harm to the second party.
- General contractor DQSI, which had a contract with the U.S. Army Corps of Engineers to perform post-Hurricane Katrina construction on a pump station, hired Fisk Electric Co. as a subcontractor. The project experienced delays of more than 460 days, but the Corps denied Fisk's Request for Equitable Adjustment on the grounds that it had already settled the electrical subcontractor's claims with DQSI. Fisk filed legal action against DQSI claiming that the general contractor said the Corps never made payment for the work performed by Fisk nor accounted for the delays. A district court denied Fisk's claims for $410,000 plus costs, stating that the company could not demonstrate "justifiable reliance," or reasonable dependence on DQSI's representations.
- The U.S. Appeals Court for the Fifth Circuit overturned the district court's decision, ruling that federal contract law did not require Fisk to conduct an "active investigation" of DQSI's alleged fraud in order to meet the standard of justifiable reliance.
This scenario was only likely to play out because all communication with the Corps about payment and Fisk's right to submit a claim for damages for delays was funneled through DQSI, the general contractor, which is standard practice because DQSI had the contractual agreement with the Corps, not Fisk.
But there are ways that subcontractors can protect their rights in case they run across a general contractor that doesn't make payment in a timely manner. First, using an attorney familiar with government contracting laws to review the contract and handle any disputes is key. Also important is knowing what federal contracting laws are in place to protect subcontractors.
The Miller Act, according to the General Services Administration, allows first-tier subcontractors — those who have a direct contract with the prime contractor — to file a civil action against the prime contractor's payment bond as soon as 90 days after the last labor was furnished but not surpassing one calendar year. Second-tier subcontractors can also file a claim against the prime contractor's bond after giving the required notice.
The Prompt Payment Act protects contractors that submit bills directly to the federal government. This rule encourages agencies to make on-time payments, which are payments that are made by the date specified in the contract, on an accelerated schedule when the conditions for accelerated payments apply or 30 days after the appropriate agency has received the invoice.
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